Question 1

Which of the following best describes the difference between accounting (translation) exposure and economic exposure in foreign currency accounting?

Accepted Answer

Accounting exposure measures the risk of changes in the value of financial statement items due to exchange rate changes, while economic exposure measures the risk that the economic value of the entity could decrease due to exchange rate changes.

Question 2

Under the Functional Currency Translation (FCT) method, which exchange rate is used to translate non-monetary assets carried at historical cost?

Accepted Answer

The historical rate at the date the asset was acquired.

Question 3

A Canadian parent company has a foreign subsidiary whose functional currency is not the Canadian dollar. Which translation method should be used to translate the subsidiary’s financial statements into the parent’s presentation currency?

Accepted Answer

Presentation Currency Translation (PCT) method.

Question 4

Which of the following items is translated at the historical rate under both the FCT and PCT methods?

Accepted Answer

Share capital.

Question 5

If a foreign operation’s assets translated at the closing rate exceed its liabilities translated at the closing rate, what type of exposure does the operation have?

Accepted Answer

Net asset exposure.

Question 6

Under the PCT method, where are exchange gains and losses from translation reported in the consolidated financial statements?

Accepted Answer

In other comprehensive income (OCI).

Question 7

Which of the following is a key indicator that a foreign operation’s functional currency is NOT the Canadian dollar?

Accepted Answer

The foreign operation accumulates cash in its local currency.

Question 8

A Canadian company purchases inventory from a foreign supplier, with payment due in 90 days. The exchange rate changes before payment is made. What type of exposure does this represent?

Accepted Answer

Transaction exposure.

Question 9

Which of the following best describes the translation of revenues and expenses under the FCT method?

Accepted Answer

They are translated at the historical rate or average rate for the period.

Question 10

Under IAS 21, what must be disclosed when the presentation currency is different from the functional currency?

Accepted Answer

The fact that the presentation currency is different, the functional currency, and the reason for using a different presentation currency.

Question 11

Which of the following statements is TRUE regarding the impact of translation methods on financial ratios?

Accepted Answer

Profitability ratios look better under the PCT method, while liquidity and solvency ratios look better under the FCT method.

Question 12

Which of the following is NOT a required disclosure under IFRS 7.40 regarding foreign exchange risk?

Accepted Answer

The acquisition differential amortization schedule.

Question 13

A Canadian parent company translates its foreign subsidiary’s financial statements using the PCT method. How should inventory be translated?

Accepted Answer

At the closing rate.

Question 14

Which of the following is a limitation of both the FCT and PCT translation methods?

Accepted Answer

Neither method captures the true economic value of the reporting entity.

Question 15

Under the FCT method, where are exchange gains and losses reported?

Accepted Answer

In net income.

Question 16

Which of the following best describes economic exposure?

Accepted Answer

The risk that the present value of future cash flows will change due to exchange rate fluctuations.

Question 17

When preparing a consolidated cash flow statement for a foreign subsidiary, which of the following is correct?

Accepted Answer

The cash flow statement is prepared by analyzing the change in non-cash items on the balance sheet after translation.

Question 18

Which of the following is TRUE regarding the application of the lower of cost and net realizable value (LCNRV) principle under the FCT and PCT methods?

Accepted Answer

Under the FCT method, LCNRV is applied using historical cost and net realizable value in Canadian dollars; under the PCT method, inventory is translated at the closing rate and LCNRV is not applied.

Question 19

A Canadian parent company eliminates intercompany profit on inventory held by its foreign subsidiary. Which exchange rate should be used to determine the amount of profit to eliminate?

Accepted Answer

The historical rate at the time the profit was originally recorded.

Question 20

Which of the following is a required disclosure under IAS 21 when there is a change in the functional currency of a foreign operation?

Accepted Answer

The fact of the change and the reason for the change in functional currency.

Translation and Consolidation of Foreign Operations: Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards